Renewable energy has quietly become one of the best places for investors to find high-quality dividends that sport high yields as well. Yieldcos like Brookfield Renewable Partners (NYSE:BEP), TerraForm Power (NASDAQ:TERP), Pattern Energy (NASDAQ:PEGI), and NRG Yield (NYSE:CWEN) (NYSE:CWEN-A) have yields of over 5% along with long-term contracted cash flows to sell energy to utilities.
If you're looking for dividend stocks with both high yields and room for growth, here is why renewable energy is a great place to start.
Brookfield's renewable kingdom
Brookfield Asset Management (NYSE:BAM) is one of the largest renewable energy investors in the world and it uses Brookfield Renewable Partners and TerraForm Power as vehicles for most of that investment. The company owns a controlling interest in both companies and has proven the ability to operate them in a way that generates great dividends as well as growth for long-term investors.
Brookfield Renewable Partners was a yieldco before the word "yieldco" became popular, assembling 16,000 megawatts (MW) of renewable energy assets, primarily hydro plants, around the world. Unlike newer yieldcos, the company doesn't rely on using its shares to fund acquisitions. Instead, it grows organically by keeping some of its cash available for distribution to fund acquisitions. Management aims for 5% to 9% organic dividend growth using this strategy.
Cash flow is backed by long-term contracts to sell electricity to utilities, averaging a term of 15 years as of last quarter. Management even says that hydro plants rolling off contract soon will also have the opportunity to increase prices because current contracts are below market. This could help increase cash flow and fund dividend growth beyond the 6.4% the stock yields today.
TerraForm Power is Brookfield Asset Management's newest yieldco, purchased from the bankrupt SunEdison. The company owns over 2,600 MW of wind and solar assets, primarily in the U.S., backed by long-term contracts to sell electricity to utilities. The average remaining life of its contracts is 14 years.
On top of existing assets, TerraForm Power recently announced the acquisition of Spanish yieldco Saeta Yield, which management says will increase cash available for distribution by 24% per share. That cash can fund an increased dividend, pay down debt, fund acquisitions, or a combination of all three. With the yield already standing at 6.9%, this is a dividend with a lot of room for growth.
Brookfield Asset Management has both the incentive and the resources to keep both Brookfield Renewable Partners and TerraForm Power growing for the long term. It proved that by backstopping the Saeta Yield acquisition and having that kind of support for future deals should help stabilize operations of both yieldcos for investors.
The wind dividend
Pattern Energy is a yieldco focused on wind projects, with 2,700 MW currently in the portfolio. The company has grown aggressively through third-party acquisitions as well as its own project development, helped by the affiliate Pattern Development, which is a separate company that feeds projects into Pattern Energy. In total, the company has a pipeline of 10,000 MW of renewable energy projects, which could quintuple the company's size and provide growth in cash flow for investors.
Pattern Energy's projects have over 14 years of average life left on power purchase agreements with utilities and corporate customers, and assets are young, with an average age of 4 years. You can see below that some projects are contracted for over 20 years.
Unlike Brookfield Renewable Partners, Pattern Energy uses newly issued shares to fund acquisitions, increasing its shares outstanding by 54% since going public in 2013. Management plans to use stock to grow the company's cash flow, and executives say there's visibility to a double-digit dividend, which would make the stock a steal trading at under $18 per share today.
Even if the dividend doesn't grow, the current 9.4% yield is a high payout for investors and makes this a low-risk stock given the contracted cash flows I highlighted above.
The yieldco that birthed an industry
NRG Yield was the yieldco that brought the industry mainstream, launched by NRG Energy in 2013. But with NRG Energy's strategy shift away from renewable energy, the controlling interest in the yieldco is being sold to Global Infrastructure Partners, a private equity firm that focuses on energy investments.
What makes NRG Yield unique is the fact that it owns renewable energy assets along with a few fossil fuel assets. The theory is the structure should allow NRG Yield to use more of its own renewable energy tax deductions, rather than selling them to investors. The downside is that natural gas and thermal assets, which make up 31% of 2018 cash available for distribution guidance, don't come with long-term power purchase agreements and are subject to the whims of the energy market. The renewable energy projects that do have power purchase agreements average 15 years remaining.
The other unique feature of NRG Yield is its dual class structure. Class A shares and Class C shares are publicly traded and are identical except the Class C shares have 1/100th the voting rights. The idea was to have shares that would be used to fund growth, but not dilute NRG Energy's (now Global Infrastructure Partners') control of the company. With Class A shares yielding 6.6% and Class C yielding 6.4%, they're both great dividend stocks for investors interested in one of the oldest yieldcos on the market.
Don't overlook yieldcos
Yieldcos don't make a lot of news in the market or generate much buzz in the media, but they're about as stable as dividend stocks get, with consistent cash flows that are contracted for years, even decades, into the future. And with renewable energy only growing in popularity, the opportunity to buy more assets to grow their dividends seems almost limitless.